Business Watch: O2 and EE tipped to return to the stock market

The two operators are being tipped for a floatation, says Dominic White, with staff at both companies possibly on course for share purchase deals

It could be back to the stock market for two UK mobile phone networks next year.

Analysts say O2 is primed for a flotation in the first half of next year to help resolve the debt headaches of its debt-ridden parent, Spain’s Telefónica.

And EE may also be listed before the end of 2013, according to a top executive at France Telecom, which owns the business with Deutsche Telekom.

It’s very early days but staff at both companies could be in line for share purchase deals if history is anything to go by.

First to O2, which analysts are tipping as the first to go back to the market.

An initial public offering would be déjà vu for the company, which has been spun out of a debt-laden parent once before.

O2, formerly BT Cellnet, was de-merged from BT in November 2001 to satisfy investors who were furious at the former monopoly’s disastrous dot-com forays overseas.

Freed from the bureaucratic shackles of BT, O2 turned into a stockmarket star under the management of then chief executive Peter Erskine.

By the time it was bought for £17.7 billion by Telefónica in November 2005, its market value had even overtaken that of its former parent.

More than 1,500 of O2’s UK staff, from call-centre workers to those on the shop floor, shared about £25 million through a share-save scheme that earned them £17,000 tax-free on average.

Since then O2 has been swallowed by another former state monolith but Telefónica has kept and built on the brand. O2 remains the jewel in the Telefónica crown.

The Madrid-based giant has already completed a €1.5 billion (£1.2 billion) flotation of a stake in its German mobile business, O2 Deutschland, and has flogged off a slew of other assets, all to help meet interest payments on its debt mountain.

Much like the BT of old, it went on a massive shopping splurge over the past 10 years, buying up assets in Europe, Latin America and China – in the process pushing its debt to an eye-watering €58.3 billion (£47 billion).

As well as the O2 Deutschland share sale (the largest IPO in Europe this year) it has raised €2.13 billion (£1.72 billion) from the sale of a minority stake in its Chinese business, China Unicom, and its Madrid call centre, Atento.

But analysts believe it still needs to raise another €2 billion to €3 billion and so is taking a hard look at the jealously-guarded O2, which would also be likely to attract interest from private equity.

Experts think Telefónica would much rather go for a partial flotation of the business rather than a full sale, so it can keep a stake in any future upside. That makes sense.

Will Draper, an analyst at Espirito Santo, told the Daily Telegraph he thought that Telefónica would do “everything it can” to avoid losing O2 altogether but tipped a float next year as it battles to implement austerity measures back home.

In another sign that Telefónica’s problems are impacting the business, O2 recently said it would convert almost half of its shops into franchise operations.

It is offering 82 of its company-owned shops to local entrepreneurs to run, in return for investments of up to £50,000 each. The idea is to release cash to plough back into the business.

Meanwhile, France Telecom has fuelled speculation that EE could come to the stock market too.

France Telecom bought Orange, now one half of EE, off the stock market during the dot-com boom.

The other half of EE is T-Mobile UK, which was originally called One2One and was acquired by T-Mobile’s parent, Deutsche Telekom, for £8.4 billion back in 1999.

The two UK mobile businesses were merged in 2010, creating Britain’s biggest mobile network – and silliest company name.

Now rebadged EE, at least for its 4G service, the business has already attracted the attention of its former chief executive Tom Alexander, who was rumoured to be mulling a bid with private equity groups such as Apax and KKR earlier this year.

Now Gervais Pellissier, deputy chief executive of France Telecom, has admitted that there “could be some space at the end of next year” for a flotation of the business.

He stressed that the parent companies would remain the majority controlling shareholders. No advisors have yet been appointed, although you can bet that investment banks are sniffing around like crazy trying to get a mandate.

Analysts have suggested EE could be worth more than £10 billion, including debt. So a sale of a decent-sized stake would bring in some much needed cash for France Telecom and Deutsche Telekom, which are having a tough time in some of their other markets at the moment.

Key to any valuation will be how well EE takes advantage of its head start on 4G services in the UK.

It has already admitted to a “teething problem” after customers complained they were having trouble connecting, getting SIM cards and dealing with call centres.

All too often in mobile, first-mover advantage has proved anything but: Three found that out to its cost when it launched the first 3G services in 2003. It was hit with a spate of customer complaints about poor service, bad reception and clunky handsets. It was in fact O2, which sat back and waited to launch last, which ended up faring the best.

That’s not to say EE can’t pull it off of course, but with its parent companies pondering a flotation and watching closely, the pressure is on to make it a bumper 4G Christmas.

Finally, Carphone Warehouse looks primed to buy Best Buy out of their European joint venture at a discount.

Best Buy faces a takeover bid in its native US which, if it succeeds, triggers an option for Carphone to buy the 50 per cent of the European joint venture it does not own at a 10 per cent discount to market value.

Carphone chief executive Roger Taylor, unveiling strong pre-Christmas sales figures, told reporters: “If it was sensible value, I would be very surprised if the board and shareholders didn’t want to take it. It is not like buying something where there is an inherent risk. It’s already our business.”